Financial Markets Review by Lloyds TSB

Sterling lost further ground this week, primarily against commodity currencies but also against the yen as concerns over the UK’s triple-A status resurfaced and the Pre-Budget Report failed to clearly outline a credible plan how to cut the medium-term budget deficit.

Fiscal outlook weighs on sterling

Sterling lost further ground this week, primarily against commodity currencies but also against the yen as concerns over the UK’s triple-A status resurfaced and the Pre-Budget Report failed to clearly outline a credible plan how to cut the medium-term budget deficit.

After last week’s poor performance, the Japanese yen was the outperformer in the G-10 space, rallying 1.4% versus the US dollar.

The USD dollar index convincingly broke out above its downward trend line (March ’09 high to Nov ’09 low) and also crossed above its 50 day moving average.

In the emerging market space, USD strength was also evident. Eastern European currencies suffered the most with the Polish zloty (3.9%), and Hungarian florint both declining against the dollar

Bond yields rose for a second consecutive week in the UK and the US following weak investor demand at US Treasury auctions and stronger than expected US November retail sales data. UK 10y yields surged over 3.85%. US 30y yields cleared 4.50% and caused the 2y/30y spread to surge above 370bps.

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